An increase in firm risk tends to result in a higher share price since the stockholder must be compensated for the greater risk.

Question

Quizplus · Accepted Answer

An increase in firm risk tends to result in a lower share price, as investors demand a higher return to compensate for the additional risk. This is known as the risk-return tradeoff, where higher risks are associated with higher potential returns, but also with a greater chance of loss. Therefore, the stock price decreases with the increase in firm risk, and not the other way around mentioned in option A.

An Increase in Firm Risk Tends to Result in a Higher